California's Department of Conservation is facing intense criticism for allowing two oil and gas companies to enter into a mega-merger that exempts them from a state law that requires the eventual sealing of depleted wells.

The Orphan Well Prevention Act (Assembly Bill 1167) was intended to ensure that fossil fuel companies, when they acquire oil or gas fields, must set aside more funding to ensure that barren or low-producing wells are plugged. Signed by Governor Gavin Newsom in October 2023, the law was an effort to make fossil fuel producers responsible for eventually plugging unplugged wells across California, preventing taxpayers from footing the bill if these companies went bankrupt.

The first big test case came soon after.

In February of this year, California Resources Corporation announced its intention to acquire and merge with Aera Energy in exchange for $2.1 billion in stock, a landmark deal that would make it the state's undisputed largest oil and gas producer. Environmental leaders initially cheered the deal because they believed the CRC would need to spend billions of dollars to ensure Aera's roughly 22,000 wells are shut down.

But the state Department of Conservation's Division of Geology and Energy Management (CalGEM), which regulates oil and gas operations, concluded the law doesn't apply to transfers of inventory. Outgoing Conservation Commissioner David Shahbazian said the orphan well law applies to transactions in which there's a change of operator, not a change of ownership.

“Publicly traded companies, including CRC, change ownership daily as shareholders buy and sell stock,” Shahbazian wrote in a letter to Assemblywoman Wendy Carillo (D-Los Angeles), who authored the legislation. “The new corporate owners do not have the authority to manage the company's assets or operate its wells or facilities.”

Environmental groups have criticized CalGEM's interpretation of the law, saying CRC is already discussing new plans for Aera's wells, demonstrating its influence over the business. They argue CalGEM's decision means CRC will have to obtain up to $30 million in indemnification bonds – contracts that make funders responsible for plugging the wells if CRC files for bankruptcy. Under the orphan well law, CRC could have had to obtain up to $2.4 billion in bonds, based on the average price of plugging the wells.

“CalGEM has characterized this as a simple stock purchase, similar to how you or I might buy Apple stock, and we think this is an outrageous and unacceptable interpretation of the law,” said Holly Kretzmann, senior attorney at the Center for Biological Diversity. “It's extremely strict and limited, and it goes against the intent of the bill's authors and Congress when they passed it.”

After 150 years of oil and natural gas extraction in California, the state has about 100,000 unsealed wells known to leak greenhouse gases and toxic chemicals. The state's once-rich oil reserves are producing significantly less crude oil, forcing some fossil fuel companies into bankruptcy and passing on sequestering costs to taxpayers.

To remove the financial burden from taxpayers, Carrillo authored the Orphan Well Prevention Act, which requires oil companies that acquire low-producing wells to obtain bonds (financial contracts similar to insurance policies) that cover the full cost of shutting in the wells.

“Companies that drill for oil in California should be responsible for cleaning up and shutting down their wells,” she said. “CalGEM's refusal to enforce the policy could put the state at risk of financial ruin. Big oil mergers are not small stock transactions.”

“Failing to enforce this law in the case of this merger would set a terrible precedent.”

Governor Gavin Newsom, speaking at a press conference, signed the Prevent Orphan Wells Act in October.

(Robert Gautier/Los Angeles Times)

Carrillo and others believed that under her legislation, the CRC would have been financially responsible for Aera's 9,200 idled and 12,500 low-producing wells, with the average cost per well being $112,000, and the CRC would have had to obtain about $2.4 billion in bonds before it could enter into any contracts.

After the merger, CRC will own more than 40,000 wells, about 16,000 of which are idled. The wells will boost the company's oil production but critics say they will also increase its debt and put it at risk of default.

CRC plans to inject global-warming carbon emissions into some of its depleted wells as part of a carbon management program, spokesman Richard Benn said.

“Over the past three years, CRC and Aera have safely shut in more than 5,000 wells and continue to shut in idled wells at a faster pace than required by law,” Venn said. “We will continue to invest heavily in our idled well management program. Importantly, the merger with Aera strengthens our financial strength and all well bonding filed by CRC and Aera prior to the merger will remain intact.”

Environmentalists say other legislation is needed to speed up the plugging of wells. Perhaps most notably: Assembly Bill 1866The bill, introduced by Rep. Greg Hart (D-Santa Barbara), would require California's largest oil operators, including CRC and Aera, to plug 20 percent of their idled wells each year.

However, some environmental activists are still calling on Governor Newsom to take action on implementing laws already on the books, specifically the orphan well law regarding the Aera-CRC merger.

“If CalGEM is acting as a rogue agency, it's time for Governor Newsom to step in and make sure the agency is enforcing the law as written and not overdoing it to please the oil industry,” Kretzmann said.